THE RESET: Fed forges ahead with easy-money policy

AP News

12/12/2012 1:47:39 PM - AP News

As President Barack Obama and Congress agonize over strengthening the economy without fattening the $16 trillion national debt, the Federal Reserve chugs steadily along on its own course of keeping interest rates low and printing money to stimulate growth.

The central bank's impact on the economy is huge. Yet it doesn't get as much attention as the fiery White House-congressional battles over the "fiscal cliff," taxes and spending.

The Fed is a hybrid — part government agency but also an arm of the banking system. That unusual arrangement helps insulate it from being buffeted by strong partisan winds.

Fed policy makers on Wednesday decided to keep aggressively buying Treasury and mortgage securities to keep the U.S. economy growing into the new year and until labor markets improve.

It's called "buying" bonds, but the purchases are mostly done with money created out of thin air — one of the Fed's singular powers.

It's risky. The flood of new money from the Fed and other central banks can touch off inflation and even trigger another financial crisis.

But so far, inflation is being held at bay by a weak global economy.

And interest rates also remain low, including 30-year mortgage rates averaging 3.4 percent, one of their lowest levels ever.

Before the recession the Fed's "balance sheet" was about $1 trillion. Now it's $2.9 trillion, headed for $3 trillion.

Still, Bernanke — first appointed by President George W. Bush in 2006 — has hinted he may step down when his term expires in February 2014.

While the threat of inflation from too much money-printing remains, the Fed can quickly reverse the process by raising rates, selling its bonds and electronically erasing the proceeds. That would contract the money supply and ease inflation pressures.